Con­cerned about ris­ing mort­gage rates? Bor­row­ers have op­tions

(StatePoint) While mort­gage in­ter­est rates re­main near his­toric lows, they have been slowly ris­ing over the last year, in­creas­ing the cost of 30-year loans for bor­row­ers.

Home buy­ers con­cerned about higher rates have other op­tions to con­sider: an ad­justable rate mort­gage (ARM), which pro­vides an ini­tial lower monthly pay­ment, or a 15-year fixed rate mort­gage, which has a higher monthly pay­ment but re­duces the amount of in­ter­est paid over the course of the loan.

A Shot in the ARM

An ARM typ­i­cally starts out at a lower in­ter­est rate than the clas­sic, 30-year fixed rate. Af­ter an ini­tial pe­riod, typ­i­cally five, seven or 10 years, the in­ter­est rate ad­justs over the life of the loan.

There are sev­eral dif­fer­ent types of ARMs, but one of the most pop­u­lar is the 7/1, which stays at the same rate for the first seven years and then ad­justs yearly there­after.

“Af­ter the fixed pe­riod, the rate can in­crease each year, but the good news is that there are caps on how high that rate can go,” says Peter Boomer, head of mort­gage dis­tri­bu­tion for PNC Bank. “The op­po­site may also be true: it’s pos­si­ble the rate will de­cline if mar­ket forces are point­ing that way. The best ad­vice is to check with your lender for the de­tails.”

What You Need to Con­sider

Boomer said it’s im­por­tant to know how long you ex­pect to be in your home.

“The na­tional av­er­age is seven years be­fore home­own­ers sell or re­fi­nance, which is why the 7/1 ARM is so pop­u­lar,” he said. “If you ex­pect to be in a home for fewer than 10 years, then you may want to con­sider an ARM.”

Boomer sug­gests talk­ing with a mort­gage loan of­fi­cer about whether an ad­justable rate may save you money. Many peo­ple like the idea of that lower rate to start, while oth­ers pre­fer the peace of mind of a sta­ble rate.

For tra­di­tional mort­gages, re­fi­nanc­ing re­mains a vi­able op­tion if in­ter­est rates fall in sub­se­quent years.

“It’s im­por­tant to re­mem­ber that mort­gage rates rise and fall over time. It may be worth con­sid­er­ing an ARM be­cause over time there may be sav­ings, as op­posed to the cost of re­fi­nanc­ing,” Boomer says.

Look at your fam­ily, job, fu­ture and goals to de­cide whether this op­tion makes sense. Your fam­ily may grow, you may get a new job and re­lo­cate, you may down­size for re­tire­ment or face other chang­ing fi­nan­cial con­di­tions. 15-Year Mort­gage

An­other al­ter­na­tive is a shorter term fixed-rate loan, the most pop­u­lar be­ing 15 years.

Ac­cord­ing to Boomer, while a 15-year mort­gage will have a higher monthly pay­ment than a 30-year fixed, the in­ter­est rate is typ­i­cally lower and you pay back the prin­ci­ple faster, which means you can save money on in­ter­est over the length of the loan.

“The good news for con­sumers is that there are many fi­nanc­ing op­tions avail­able. Talk to your loan of­fi­cer to dis­cuss which best fits your sit­u­a­tion,” he says.

To learn more about bor­row­ing op­tions, visit pnc. com.

Own­ing a home is on the path to keep­ing your Amer­i­can dream alive, and ex­plor­ing your op­tions can help you more eas­ily achieve it.